Can a Tax Be 'Fair'?

By Laurence M. Vance

Representative John Linder (R-GA), one of former House Speaker Newt Gingrich's top lieutenants, has announced that he is retiring and will not seek reelection. First elected to Congress in 1992, and representing Georgia's seventh congressional district since 2003, Linder's claim to fame is for continually introducing legislation that never passes.

Linder is the primary sponsor in Congress of the FairTax, a progressive national retail sales tax. The FairTax is the brainchild of three businessmen concerned about the crippling effects on the economy of the current federal tax code. After adopting the name "FairTax" for their tax-reform plan, they formed Americans for Fair Taxation in 1997 and enlisted Representative Linder to introduce FairTax legislation in Congress. Linder first sponsored the "Fair Tax Act" in the House in July of 1999, and has reintroduced a FairTax bill at the beginning of every term of Congress since then.

The current incarnation of the FairTax is H.R. 25, the "Fair Tax Act of 2009." This bill was introduced on January 6, 2009, and has 61 cosponsors, including one Democrat, David Boren of Oklahoma. Notably absent from the list of cosponsors is Representative Ron Paul (R-TX), continually acknowledged as the taxpayers' best friend because of his consistent voting record against unconstitutional spending. The FairTax bill is currently languishing in the House Committee on Ways and Means (as it does each time it is introduced). A companion bill was introduced in the Senate (S. 296) on January 22, 2009, by Saxby Chambliss (R-GA), but it only has 4 cosponsors, all Republicans. It is sitting in the Senate Committee on Finance.

Former Republican presidential candidates Mike Huckabee, Thomas Tancredo, and Duncan Hunter have been supporters of the FairTax. The most vocal proponent of the FairTax outside of political circles is radio talk-show host Neal Boortz. He is the author, with Congressman Linder, of The FairTax Book (Regan Books, 2005) and a sequel, FairTax: The Truth, Answering the Critics (Harper, 2008).
The FairTax is a consumption tax in the form of a national retail sales tax on all services and the final sale of all new goods. All services, except tuition, would be subject to the FairTax -- from heart surgeries and funeral services to haircuts and manicures. And although the FairTax would only be levied on the final sale of new goods, nothing is exempt -- not food, not prescription drugs, not new cars, not even new construction (what would the FairTax be on a skyscraper?). All Internet purchases of new goods would also be taxable.

In exchange for these new taxes, there would no longer be -- on the federal level -- personal income tax, corporate income tax, capital gains tax, Social Security tax, Medicare tax, unemployment tax, alternative minimum tax, gift tax, or estate tax. However, without an income tax, all tax deductions, exemptions, and credits would also be eliminated. No more child care credit, education credits, earned income credit, personal exemptions, home mortgage interest deduction, etc. The FairTax would not do away with other federal taxes like tariffs, excise taxes, and special taxes on things like airline tickets. State and local income, property, and sales taxes would be unaffected as well.

The reason for such a radical tax-reform proposal is obvious: the intrusive, wealth-destroying, income redistributing, social engineering monstrosity known as the U.S. tax code. With its progressive brackets that punish success, refundable tax credits that allow some Americans to receive a refund after paying no taxes, and arcane rules and schedules that confound not only seasoned tax preparers, but IRS employees, the tax code in the 20 volumes of Title 26, "Internal Revenue," of the U.S. Code of Federal Regulations is an abomination.

The appeal of the FairTax should be evident as well: no more record keeping, no more taxes withheld from paychecks, no more compliance costs, no more tax forms, no more IRS audits of individuals, no more lines at the post office on April 15th.

But that's not all. Proponents of the FairTax also tout some additional benefits it is supposed to bring. Congressman Linder believes that under the FairTax we would see an increase in GDP, exports, real investment, real wages, economic growth, and economic efficiency. Neal Boortz maintains that the FairTax would result in the creation of millions of new jobs, an increase in foreign investment in the United States, and be a financial bonanza for the poor and middle class. Both claim that prices would decline and interest rates -- which are already at historic lows -- would drop by 30 percent.

These grandiose claims for the FairTax notwithstanding, there is no question that the beauty of the FairTax is its simplicity. This beauty, however, is only skin deep. The FairTax promises a utopia that is simply too good to be true. The cure offered by the FairTax may even be worse than the diseased federal tax code it is designed to replace.

The price of the FairTax's simplicity is a 30 percent national sales tax on all new goods and services in addition to the state and local sales taxes already levied in most states and many counties and cities. And it is not just individuals who would be responsible for paying the tax: State and local governments would, unlike now, be required to pay taxes to the federal government on the goods they purchase, and the federal government would pay taxes to itself.

The FairTax rate is usually given by its proponents as 23 percent, with the caveat that the rate is figured inclusively (the tax is included in the price of the product) rather than exclusively (the tax is added to the price of the product) like it is computed in every state that assesses a sales tax.

Obviously, it is much easier to sell a national sales tax to the American people if the rate is 23 percent instead of 30 percent. But whether one thinks the rate is 23 or 30 percent, the fact remains that it will cost Americans an extra 30 cents on the dollar to purchase any new good or service under the FairTax. Some economists don't think that either of these rates would be high enough to fund the government at its current level. And as a practical matter, as bad as the current system is, I don't think the American people are ready to pay an additional 30 percent sales tax on their purchase of a $30,000 new car on top of the state and local sales tax that they already pay.

Although it seems as though the exchange of the income tax for the FairTax would lead to higher prices on all new goods and services because of the new sales tax, FairTax proponents claim that the removal of embedded taxes would result in the prices of goods and services falling by enough to offset the amount of the sales tax imposed. Now, it is true that the current price of consumer goods includes embedded taxes like corporate income taxes and the employer share of Social Security and Medicare taxes, but the amount by which it is claimed that prices would fall under a FairTax system has been grossly exaggerated. What we know for certain is that under the FairTax retail prices will increase by 30 percent; what we don't know is how much prices will decrease after their embedded costs are removed.

But not only will the lower prices on goods and services help consumers to pay their new federal sales tax, the FairTax also includes a monthly rebate to offset the taxes paid on basic necessities. This "prebate" would be based on family size and the government poverty level. There would be no means test; every household -- including the "rich" -- would receive a prebate. And as Boortz mentioned in his first book on the FairTax, for some households the amount of the prebate might even be more than the sales tax paid. Thus, although everyone would pay the same rate under the FairTax, the end result would be that some Americans would pay no taxes at all, some would have most of their taxes offset, and some would get more money back than they paid in taxes. This makes the FairTax an income redistribution scheme under the guise of tax reform.

There are three fundamental problems with the FairTax: the arbitrary concept of fairness, revenue neutrality, and the nature of taxation.

Maintaining that the FairTax is a "fair" tax system, or one that is "fairer" than our current system, is highly subjective. Boortz himself even acknowledges this in his most recent book on the FairTax: "Whether a tax system is 'fair' is a complicated economic and philosophical question, one that inevitably involves oversimplification and subjective judgment." Some Americans think it is fair that other Americans pay for their health care. Some Americans think it is fair that other Americans subsidize their housing. Some Americans think it is fair that the top 50 percent of wage earners pay 97 percent of the taxes. Why should it be considered fair for the federal government to confiscate 23 or 30 percent of the value of every new good or service? The late economist Murray Rothbard, although he died before John Linder introduced the first FairTax bill in Congress, said it best: "There can be no such thing as 'fairness in taxation.' Taxation is nothing but organized theft, and the concept of a 'fair tax' is therefore every bit as absurd as that of 'fair theft.'"

The concept of "revenue neutrality" is one that all advocates of liberty and less government should be suspicious of. The FairTax, like all other current tax reform plans, is revenue neutral. It merely allows the federal government to confiscate the wealth of its citizens more efficiently. The problem with revenue-neutral tax-reform plans is that every federal agency, every federal program, every pound of federal pork -- would be funded exactly as it is now. As Boortz likewise says in his newest book: "The goal of the FairTax movement is not to strangle the life out of government by depriving it of needed revenue." The FairTax merely shifts the debate from how much wealth the federal government confiscates to the manner in which it is confiscated. Obama's trillion-dollar budgets, like Bush's trillion-dollar budgets, shouldn't be funded by replacing one tax with another -- they shouldn't be funded at all.

The root of the problem is clearly taxation itself, not the tax code. Liberals are not opposed to taxes on principle, and have no problem using the tax code for their various social engineering and income redistribution schemes. Conservatives are generally not opposed to taxes on principle either, as long as they are used in the right way -- to fund U.S. military adventures around the world, anything related to law enforcement or homeland security, faith-based welfare programs, educational vouchers, abstinence-education programs, and the war on drugs. Yes, the tax code is too complex, too intrusive, too long, too full of loopholes, and too progressive. But if rates are low enough, then it really doesn't matter how taxes are collected. The FairTax perpetuates the fallacy that the government has a right to confiscate a percentage of the value of each new good sold and every service rendered. This is no different than claiming that the government has a right to the portion of each American's income that it takes under the current system. As Rothbard explains:

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.

It's time to retire the FairTax. Although on the surface it sounds like a workable solution to the problem that is the U.S. tax code, it promises a utopia that it cannot deliver. The FairTax creates new taxes, new taxpayers, and new tax collectors, makes it easier for the federal government to raise taxes, institutes universal welfare with its prebate check, has unknown and potential huge transition costs, could saddle us with a sales tax and a reconstituted income tax, and has a stated rate that is too low to achieve revenue neutrality, a problematic concept in itself. The federal government has an insatiable lust for Americans' money to maintain the welfare/warfare state. All revenue-neutral tax-reform plans allow Congress to maintain its spending orgy while appearing to make taxes "fairer." The FairTax -- as acknowledged by Boortz and Linder -- would merely change the way taxes are collected. And not only is it not an incremental step toward lower taxes or tax rates, it contributes nothing toward returning the size, scope, and cost of the federal government to its proper constitutional authority. As Congressman Ron Paul has said: "The real issue is total spending by government, not tax reform."